Now for the creative part
Despite the gloom, there are several reasons for believing that American business retains its underlying dynamism. First, one can listen to what businesspeople say. They may be feeling wretched this year, but few doubt that things will get better. Bill Green, the boss of Accenture, a consultancy, predicts that America will come out of the recession "much earlier" than other parts of the world. He talks constantly to other chief executives around the world, he says, and their consensus is that America will begin to recover later this year or in early 2010. They give three reasons. The recession started earlier in America than elsewhere. The government's stimulus package is likely to work. And "they believe that we have a natural competitive streak—that people are going to want to get back in the game."
Second, one can look at America's admirable record of dealing with turmoil. A study by the Ewing Marion Kauffman Foundation, a think-tank that studies entrepreneurialism, found that America's high rate of economic "churning" boosts productivity and hence material well-being. Between 1977 and 2005 some 15% of all American jobs were destroyed each year as firms closed or cut back. Thanks to the expansion of successful firms and the entry of new ones, however, many more jobs were created than destroyed. Start-ups (ie, firms less than five years old) provided a third of the new jobs during this period.
Start-ups that went bust were on average 32% less productive than mature incumbents. Mature firms that went out of business were 27% less productive than mature survivors. Start-ups that survived, however, were 3% more productive than mature incumbents; five years later they were 5% more productive. This was true of all industries but especially retailing, in which stores the size of football fields have given way to even larger ones.
The credit crunch is making it harder for new firms to find capital. That matters: not all entrepreneurs start up in their garages with money from "family, friends and fools". In a survey for the Kauffman Foundation of 4,163 companies started in 2004, Alicia Robb and David Robinson concluded that 80-90% of start-up capital for a typical firm came from two sources. One was the entrepreneur's savings. The other was external debt: either a bank loan or a credit-card balance.
Most start-ups do not require huge amounts of capital. The average in the Kauffman sample was $78,000. Some need far less. Saudia Davis, for example, founded Greenhouse Eco-Cleaning, a green apartment-cleaning firm in New York, with $800 she earned from mopping floors herself. She now has between seven and ten cleaners working for her and would like to expand, but banks are not lending, she says. She is looking for an "angel" investor but this is tough when you have no intellectual property, so she may have to grow organically.
The recession itself sometimes generates start-up capital, in the form of severance payments. Adrienne and Kelly Lumpkin got their start with the help of a redundancy package Mr Lumpkin received from IBM in the early 1990s when Big Blue was in trouble. Alternate Access, their Raleigh, North Carolina-based firm, helps florists, doctors and other small enterprises do clever things with internet telephony. It offers call-centre services, for example, and sells software that helps employees see, on their computer screens, whether the person calling them is an important customer or a deadbeat.
Despite the recession, Americans started 530,000 businesses a month last year. And firms founded during tough times have to be tough. Although more firms typically start up in fat years, Paul Kedrosky of the Kauffman Foundation found that each bad year in America since the second world war produced just as many firms that have subsequently grown large enough to list their shares. He concludes that firms that begin in bad times are more likely to turn out to become economically important: think of Microsoft, Apple and Krispy Kreme doughnuts.
During good times, any idiot can get his ideas funded, says William Barnett, a professor at Stanford University's business school. During bad times, only the most impressive and persistent entrepreneurs can. Mr Barnett has discovered that firms which are set up shortly after a successful IPO (initial public offering of shares) by another firm that does roughly the same thing tend to do very badly. By contrast, firms founded shortly after news of the bankruptcies of firms doing roughly the same thing tend to do well. Google, for example, got started just after a clutch of other search-engine firms crashed.
During a crisis, says Mr Barnett, the market's signals are clearer. During a boom, people buy stuff without much thought. During bad times, they are much choosier. So only firms with genuinely superior products or services will thrive.
Howie Rhee, MBA
Center for Entrepreneurship and Innovation
Fuqua School of Business, Duke University
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